Q2 2022 Federal Realty Investment Trust Earnings Call
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Good morning, Thank you for joining us today for federal Realty's second quarter 2022 earnings conference call. Joining me on the call are Don Wood, Dan G. Jeff buckets. When D. C are unlawful salt life there'll be available to take your questions at the conclusion of our prepared remarks.
A reminder, that certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward looking statements include any annualized or projected information as well as statements referring to expected oriented stated events or results including guidance.
Federal Realty believes the expectations reflected in such forward looking statements are based on reasonable assumptions, but our real future operations and its actual performance may differ materially from the information in our forward looking statements and we can give no assurance that these expectations can be attained the earnings release and supplemental reporting package that we issued this morning.
In our report filed on Form 10-K, and our other financial disclosure documents provide a more in depth discussion of risk factors that may affect our financial condition and results of operation and then the number of participants on the call. We kindly ask that you limit yourself to one question and an appropriate follow up during the Q&A portion of our call. If you have any additional questions. Please re queue.
And with that I will turn the call over to Don Wood to begin our discussion of our second quarter results Don.
Thanks, Leah and good morning, everyone.
An all time record quarter for us and a number of important respects, none more important than bottom line earnings.
At $1 65 per share or about.
2022 second quarter handily beat our previous record of $1 60 posted three years ago in the second quarter of 2019.
Even when adjusting for Covid, one timers second quarter episodes per share matched our previous high watermark.
Lots of things going very well here, etc. We.
We did more deals both on a comparable basis and overall in those 90 days than we've ever done in our company's 60 year history.
We continue to lease up our development pipeline and increase our occupancy percentage we ended the quarter at 94, 1% leased.
We've added multiple new strategic properties to our portfolio that have clear path to future growth.
On our balance sheet remains strong with $177 million of cash on hand, and zero drawn on our $1 billion line of credit at quarter end.
Have you been saying all along the execution of our multifaceted business plan, which in these uncertain times does not rely on a big bet on any one particular income stream.
To set us up extremely well for the future.
The quality of our assets combined with our sector, leading demographics and high barrier markets tend to outperform through economic cycles as has been the case every time in the last 25 years.
So check this out because we did just get new demographic data and as of as of August 1st So within three miles of our centers.
There are 175000 people on average.
68000 households, like 8000 households, right.
<unk> hundred $50000 of average household income.
That equates to $10 $2 billion of spending power within three miles of our shopping centers.
And more than half of those people have a four year college degree or better who else can say that it's about that spending power. That's critical in uncertain times in my view.
And cyclicality of the economy is far different than the unprecedented restricted market shut down due to a global pandemic they're different.
Perhaps the best way, we can demonstrate our confidence in the portfolio is by standing behind and in fact, raising our dividend to shareholders. Just as we have each and every year since 1967 now.
1967.
That's 55 years of totally unprecedented track record among reach among <unk>.
Companies in any industry.
One that speaks to the commitment to our owners and to the quality of the income stream.
At an annualized rate of $4.32 a share that's a three 1% dividend yield at the current share price pretty darn strong for a company of this quality.
Okay.
Let's start with leasing during the quarter.
Over the last decade average second corporate quarter production for comparable properties at federal that's done.
A little less than 100 deals for just over 400000 square feet.
In the 2022 second quarter, we did 132 deals for 562000 square feet nearly 40% more than the average.
And we've never come close to doing 132 deals in any quarter.
But the fact that demand is renamed this heated with a deal pipeline that looks to stay strong speaks.
It speaks volumes about our properties and the markets that theyre in and naturally about future earnings growth. So one of the reasons Dan is again raising annual earnings guidance 23 cents at the midpoint.
So one of the more underappreciated phenomenon of the strong demand is that we're able to be more proactive in terms of leasing space, that's not yet baked.
Well that leasing doesn't immediately show in the occupancy stats it wouldn't mean less downtime in the future and shopping centers that are merchandise with more relevant tenants sooner than they would otherwise be.
The portfolio was 94, 1% leased 92% occupied at quarter's end with continued improvements expected by year end, particularly on the small shop side.
At 89, 3% leased small shop space is a remarkable 580 basis points higher than the Covid low point.
Our stepped up post COVID-19 reinvestment effort is another critical component to future growth.
It's no news to anyone on this call that just traditional generic and homogenous shopping center business is cyclical in nature and not a high growth business. So you have to stand out to outperform over cycles.
You do that by picking the right markets and positioning in merchandising in those markets, but you also have to reinvest to continually find the edge reinvesting is more important now than ever before.
It's why we have nearly two dozen active and meaningful development projects in planning or underway totaling over $100 million. This year, and next which will likely yield double digit unlevered yields over the ensuing years through higher customer traffic and rents in line with our historically observed results following property improvement projects.
That reinvestment is one of the primary reasons, we can continue to push rents.
Leasing has been exceptionally strong at our newly newly development assets also from.
From the completion of Coca walk to the office projects at Pike <unk> rose to the residential over retail gallery in the residential and office phase III at Assembly row. Each of these additions have exceeded our post COVID-19 expectations in terms of lease up pace.
In the case of the residential product at assembly, it's exceeded in both pace and rental rate.
Now the one exception is Santana west and Theres no question that the cooling of the technology sector in the last 90 days both in terms of their stock prices and getting employees back into the office has been a wet blanket on what had been strong leasing momentum.
It has therefore been difficult to break fully negotiated deals over the transom.
Disappointing, yes, well when put in proper perspective, having a brand new state of the art office building adjacent to one of the most successful amenity rich destinations in the tech capital of the country isn't so bad.
Particularly since it only represents about 2% of federal's asset value and will be an important driver of future growth when it hits its a matter of time stay tuned.
We've also remained active on the acquisition front.
Following the end of the quarter, we completed the all cash acquisitions of two very special properties and two of the markets, where we're focused on expansion the.
The shops at Pembroke Gardens, a 392000 square foot dominant retail center on 41 acres at the corner of I 75, and Pines Boulevard in Pembroke Pines, Florida, as an important asset to our portfolio eight miles south and west about equally dominant tower shops center in daily and 20 miles north of our <unk>.
We completed and highly acclaimed Coca walk mixed use destination in coconut Grove.
Our ability to re merchandize and push rents potentially add density down the road and fortified federal as a must talk to player in South Florida were all considered in this important acquisition.
The $180 million purchase will generate better than 5% return in year, one with a very strong going forward NOI growth that will produce an IRR well in excess of our cost of capital.
Across the country in Scottsdale, Arizona, we were able to acquire the 214000 square foot office building directly adjacent to our Hilton <unk> village property, giving us over a third of a mile of continuous contiguous frontage on Scottsdale road immediately across from the main entrance to Paradise Valley the region's most.
Apple nor view underserved community.
This $54 million of acquisition were geared sick will yield 6% in year, one and like Pembroke is expected to provide very strong NOI growth that will produce an IRR well in excess of our cost of capital.
These two acquisitions along with the previously announced 410000 square foot Kingstown shopping center in Northern Virginia represent a combined investment of $435 million at a 5.25% year yield in year, one and more importantly, very strong IRR irr's on three dominant retail.
Okay. That's.
Got it from my prepared remarks. This morning, though I want to leave you with one final thought before turning it over to Dan.
Investing decision to grow tougher as economic uncertainty increases and real estate investing is clearly a cyclical business. It's why the underlying business plan that this company has always contemplated cycles in its investment strategy is.
These are the times, when well leased well located dominant retail and mixed use centers and supply constrained affluent densely populated markets and Submarkets shine.
Whatever it is to come economically over the next couple of years federal is well positioned to outperform.
Yeah.
As Don outlined the record $1 65 per share our reported <unk> for this quarter blew away our expectations and consensus by over 10%.
As in the first quarter, our outperformance was across all aspects of our business.
Continued gains in small shop occupancy stronger performance in our residential portfolio surging parking revenues and gains in percentage rent underscoring continued momentum in consumer traffic and tenant sales higher.
Higher collections and forecast both in the current and prior period and larger term fees offset.
By higher G&A and interest expense.
Well some of these items can be considered timing related or nonrecurring. The lion's share of this outperformance is driven by continued strength in our in place portfolio, which drove another increase in our guidance.
Let me spend a little time here, highlighting some metrics, which demonstrate the strength.
Led by our dominant mixed use properties.
Near record parking revenues are strong indicator of consumer traffic at our mixed use assets was a near record $3 million for the quarter.
Up 80% over second quarter of 2021 levels and up 25% sequentially over the first quarter.
Percentage rent and indicator of tenant sales strength was up over 90% on a comparable basis and up 18% sequentially on a rolling 12 month average.
With respect to specific set tenant sales metrics at Assembly row reported tenant sales were up 13% over 2019 pre COVID-19 levels and are up 10% sequentially on a rolling 12 month basis versus first quarter.
At Santana row tenant sales were up 13% over 2019 with traffic up despite the impact from work from home.
But that does erode tenant sales were up 9% over 2019 and at Pike <unk> Rose reported sales are up over 5% versus 2019 levels with consumer traffic up almost 10%.
These data points all serve as a testament to the relative strength of the consumer and our high income highly educated densely populated high barrier markets.
Again markets that have demonstrated resilience over cycles and the ability to outperform during cyclical downturns.
Very different than the pandemic related market specific government shutdown.
As a result, our comparable portfolio growth metric was again sector, leading at eight 2% for the quarter.
Comparable growth excluding prior period rent and term fees was nine and a half per cent.
As we highlighted last quarter cash basis same store metric would have been 9%.
And 10, 5%, excluding prior period rent and term fees.
Yeah.
Term fees this quarter were actually up up to $5 6 million versus $3 4 million in 2021.
Prior period rent was down to $3 million versus $6 million and it's a 6 million in the second quarter of 'twenty one as adjusted reflects only COVID-19 related prior period rent payments.
Year over year occupancy results were also strong.
As our overall occupied metric grew 240 basis points year over year from 89, 6% to 92% and our lease percentage increased 140 basis points from $92 seven to 94.1, we should continue to see upside in those metrics as we realistically.
Target 94 to 95 per cent per occupied and 95% to 96% for at least.
As we have now had eight consecutive quarters of above average leasing activity.
We are continuing to see strength and we're continuing to see strength in our leasing pipeline is it's never been this fall.
The volume of deals in process are up 15% versus pre Covid 2019 levels and are as strong as they were last year at this time, when we had a record year of leasing volume.
While deals in the pipeline still need still needs to be brought to completion <unk>.
And as a broad based across tenant categories as best in class retailers, all look to expand and upgrade their real estate footprints.
Within Federal's best in class portfolio.
And again, we had strong.
Solids.
Quarter, achieving sector, leading rent bumps.
And we continue to drive average annual contractual increases in the two to two and a half per cent range across all our leases anchor and small shop.
Now, let's review the review the math once again for every one percentage point more in annual rent bumps the ending rents and your 10 will be nine plus percent higher over a 10 year lease.
Plus you're collecting more rent along the way.
Contractual rent increases do matter.
With respect to our residential portfolio now stands at 98, 5% leased on a comparable lease basis and 97% leased overall. When you include the new 500 unit Michelle a building at Assembly row, which we expect to stabilize this quarter.
We hadn't expected masella to stabilize until late fourth quarter and it is now achieving higher rents and lower concessions than we had underwritten.
And despite this competition from the new 500 units next door, our existing montage residential tower at Assembly.
Most 100% leased and saw a 23% rental increases during the second quarter.
Now onto the balance sheet and an update on our liquidity.
At June quarter end.
We had $1 2 billion of total liquidity.
With an undrawn $1 billion revolver, and a 177 million of cash.
Additionally, we have over $400 million of noncore dispositions under consideration with pricing expectations at a blended cap rate in the sub 5% cap range.
We closed out our remaining forward equity this quarter issuing $177 million of common stock at a net price of $120 per share further bolstering our liquidity.
With respect to our leverage metrics at quarter end, our net debt to EBITDA ratio is now down to five eight times annualized for the quarter as we continue to target a ratio in the low to mid five times range over time.
Our fixed charge coverage ratio increased to four three times comfortably above our targeted level.
93% of our outstanding debt remains fixed rate.
Our significantly derisked $700 million of in process, our in process pipeline of active redevelopments.
Is $340 million remaining to spend much of that being tenant improvement dollars types of tenant leases.
Now onto guidance.
Given the comprehensive outperformance during the quarter across all aspects of our business, we are increasing our guidance by roughly 4%. That's 23 cents at the midpoint towards tightened range of 610 to 625.
One to two of the 23 cent increase is from our recent purchase of Scottsdale form in Phoenix, and Pembroke Gardens in South, Florida, and they're roughly half year contribution to 2022.
The balance is from another quarter's outperformance and a better than forecast outlook for the rest of the year in both the comparable and non possible pools.
This guidance assumes ranges of $1 48 to $1 55.
<unk> per share for both the third and fourth quarters.
Which reflects an increase over our previous guidance for those quarters.
We are also bumping our forecast for comparable POI growth to 5.5% to 7% from the prior range of three and a half to five a 200 basis point increase for the metric.
Excluding prior period rents in term fees are comparable POI forecast increases to seven and a half of 9% from the prior range of six and they have to eat.
While the cadence may be a little choppy, we continue to expect our occupied rate declined from 92%, where it is today up into the 92.5% to 93% range by year end.
We continue to get tenants open on time and on <unk>.
Budget overall.
A testament to the capability of our legal leasing tenant coordination and property operating teams.
No I don't want to just highlight those specific groups federal Yeah, Let me take a little bit of time to thank and congratulate all 320 employees that federal for the tremendous effort over the last two plus years, working intelligently creatively and tirelessly through an unprecedented.
The unprecedented challenges of Covid.
But also for driving to achieve a record quarter in funds from operations for the company.
For many of US here at federal it really means something to be part of a company that stands alone in the REIT sector with a 60 year public history, coupled with a 55 year track record of increasing dividends.
Celebration of both of those milestones members of the federal team we've ringing the closing Bell at the New York Stock Exchange it's afternoon.
And lastly, during the quarter, we released our annual corporate responsibility report available on our on our website I encourage all to give it a read to appreciate the long standing and established commitment to sustainability.
Our communities, our corporate culture, and our strong governance practices that we have that federal and.
And with that operator, please open up the line for questions.
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One moment, please while we poll for questions.
Our first question is from Alexander Goldberg with Piper Sandler. Please proceed with your question.
Hey, good morning Goldfarb.
First enjoyed its all written today and as Sean I have to figure decision during the pandemic did not cut the dividend certainly paid off so that's the decision on your part, but I guess are you know well done attitude two questions here first.
You guys are booking you know certainly you've expanded into Arizona into Florida.
What's going on with the tenants as far as are there regional tenants, which you would have normally seen in like your home bases in New York or or Bethesda, mid Atlantic or or San Francisco et cetera that really arent down in Florida, Phoenix, and you see an opportunity to bring tenants down where people who used to live in your home Mark.
Could have move down or is your view that because the countries become so sort of homogenous that there's less opportunity and as people move to new markets, it's not as though they're really missing that many of their home stores or at home restaurant or whatever it is.
Listen Alex first of all I Gotta really thank you for that comment on the dividend because we in this company believe what you just said in terms of its importance more than more than a lot of people for whatever reason so yeah, we're real proud to have.
And be able to raise the dividend every year since since 1967 that includes COVID-19.
With respect to your question on on you know demand in and regionalization of our tenancies is there.
Absolutely.
Tenants that are that are looking for new markets to expand into and you know.
Particularly the well capitalized companies to be able to do so what what is always important to us and I know you've heard this before but it's so true is the merchandising of those centers. So when you look at cocoa walk and you look at the mix of regional tenants, but also really important local tenants that make the place special.
It does secret sauce is the mix that that that happens and yes. We will have success effectively getting any particular tenant with the wherewithal to be able to expand to the extent, we can show them a profitable opportunity in a new market.
And I think we can do that I think we do that well, Jeff Yeah, you know Alex its a bit of a two way street, particularly between Arizona, and California, and what we've found.
You know in the last year or so since we've been in Arizona, there are relationships, our leasing people in California can bring to us.
The leasing team that's running our Arizona properties and in addition.
Particularly in the food space, whether it's you know quick serve or sit down or or some other type of specialty food. There are some really good operators in the Phoenix Scottsdale market. We're now closing to our California portfolio. So it is a it is a two way street.
Will abandon because there are two of the expansion.
Okay.
The question is.
Don You mentioned, you know Santana west looks to be sort of on pause as far as the leasing and what's going on with tax.
Where in your portfolio, where you are where you have often are you seeing a similar slowdown or unacceptable race and as you know more people look to work remotely or work in suburban settings, just curious if santana west as a read through to the entire portfolio or stands in contrast to the portfolio.
That's a great question and you know are the the two places in particular, where we're where we continue to lease up our office product both at Pike <unk> Rose.
And at Assembly nothing has changed they are there is there is still a strong demand and we're running at about you know are at the at the choice building, which is the the one that choice has taken about 40% of the building for we've got really good activity are moving along and in our in the rest of that building in that.
Great.
Just one other comment on on on Santana West Man.
Short Silicon Valley at your own peril.
Yeah, you know the.
The D C.
There was no question that that a pause caused by getting people back to work and what's that going to be and what our space needs are going to be at the same time or those stocks have been hammered I mean, you as a CEO any of us as a C O would sit back and take pause about that but when you think about that that particular.
And that particular place and what is likely to happen you have to be positive about that over the Jeff you got anything really to say further on that yeah. Let me, let me add a little bit to that all Columbia also maybe cleaning up a bit where you're starting to you know you mentioned San Francisco is one of the markets. We're in where we're not in San Francisco.
We're in Silicon Valley, and there's a big difference between the two and you know a lot of people.
Read headlines and watch the news in here about things that are happening in San Francisco and I attribute it to the whole Bay area. That's yeah. It's just not accurate if you will in San Francisco still struggling mightily through some are social issues that are making a return to office and office leasing very difficult and that's that's not really the case in silicon.
Valley.
We are a we're not.
Not taking a pause on leasing if you will we're out there working as hard as we can to lease a building as quickly as we can you.
Year to date.
Silicon Valley Class a office market has absorbed 2.8 million square feet of space.
Vacancies, 12%. If you include sublease space I think it goes up to 14, which historically for Silicon Valley is not agree but nationally those aren't bad numbers and last quarter. There was a 1.8 million square feet of positive net absorption in four big leases.
Between 150, and 380000 square feet that accounted for $1 1 million square feet of that positive net absorption. So I think what's happening now is and you know it's gonna be choppy for a few quarters and I think we're probably going to see more sublease space coming to market.
The companies are really struggling with a way to get their employees back to work and figure out what the appropriate location and space needs are for those employees.
And I think we're going to see some downsizing.
And perversely that might work to our advantage and Santana row, you remember net up took 700 Santana row, because they downsized out of multiple buildings.
<unk> state of the art and not fully amount of ties and there's other tenants in the market right now that are thinking about doing the same thing.
And when you look at one Santana West It is deal away when we monetized class a building outsize in Silicon Valley, So well I think it's like Don said disappointing that we're not loose yet.
We're working hard on them and we're confident about it and when you step back and look at the rest of our portfolio.
Excluding one Santana West and 915 meeting Street, which is still under construction are class a office space and our other office space at our mixed use properties is 95% plus latest there was a very very strong positive reaction.
Whether you're a small tenant or a large tenant to author thing in properties that offer a full range of amenities close to where your web.
Which is why we bought formed out in Scottsdale.
We can talk about that further if you want but I just wanted to make sure you got the full kind of detail along the Oh, what's going on in the portfolio and our thinking going forward on on one Santana west.
Thank you. Our next question is from Craig Schmidt with GSA. Please proceed with your question.
Okay. Thank you.
Good morning, Phil.
I'm just wondering if the the second quarter result.
I really highlighting the difference in dealing with the Covid market.
Pressure versus dealing with the challenging interest rate an inflationary market pressure.
The former you have very little control, but the the latter would seem like whether it's your first ring demographics or the qualities of your center, you're able to put up you know.
More of a challenge to it.
The end of the day that means you got to have money to spend that means there's got to be great products out there what I. What I think is really you know and obviously I think this about federal is that we don't go all in on any one particular format. We don't go all in you know on on.
Any one particular market and so the the the notion of be sector, leading demos I mean, I've said it in the in the prepared remarks think about this $10.2 billion worth of of spending power within three miles of this portfolio of assets.
That's that's a crazy big number and so so does that help you work through good times, and bad times and higher interest rates and inflationary pressures of course. It does it's not a leap and I think that's got more to do.
With this performance and the performance that that whatever that might be over the next few quarters and few years than anything else.
And what are you hearing from your tenants that are our you've taken space now.
You know the challenge being you know, there's a possible recession soft or otherwise.
We still haven't solved inflation and yet they're there they're taking space. So what are the what are they telling you.
That there seem that that gives them the confidence.
He wanted to make sure.
Yeah.
Thanks, Craig.
Basically Brian Covid and post Covid that the retail is concerned that their greatest.
Customer acquisition tool and the right locations and so they are focused on that to set the stage for growth continuing especially as more relevant tenants and the savvy tenants and there's a sense of urgency in getting the right real estate and we're seeing that in our performance, we're seeing that in our pipeline and we're seeing it on a very.
Reed.
Shopping center opportunities that we have without it's not just value based its not just service based it's it's all across the sector full cases apparel and value like Wow. So we are we are seeing that sense of urgency on setting their fleet in the right direction for the growth and being able.
To go through what is normal cycles, and being able to mitigate that down downside.
Yeah.
Thank you. Our next question is from Craig Melman with Citi. Please proceed with your question.
Hey, good morning, I, just wanted to go back to the leasing during the quarter and the pipeline I'm looking at the stats. You know you guys had a healthy amount of renewals there and just kind of curious from a tenant perspective, how much of that is being pulled forward as tenants when they walk in rates.
Today in anticipation of maybe higher rents in the future and how you're balancing that against.
You know potential tenant mix and credit versus kind of downtime every type of thing.
Yeah, I think what you're what I I don't know that I spoke of 100% from quarter to quarter on renewal rates and whether that's slightly up or slightly down because they all have a way of working themselves out throughout the year, but what I will say that we are seeing a tremendous amount of retailers within our portfolio.
Want to have those discussions a little bit earlier, because they want to invest in their store and want to make sure that they have the time because they see the value of the real estate long term they want it in best and and that's we're seeing it as a very positive momentum.
And we're also in Boston in a big way on our shopping funnel. So the partnership together and very strong.
And it is a robust discussion you know, there's there's obviously attention, particularly in an inflationary environment, where we're pushing hard to get the kind of increases during the term that Dan talked about in his prepared remarks and.
Not give.
An excessive amount of term on them when we're in an environment like this so it's a healthy conversation.
It's not unusual.
Every lease negotiation.
And Wendy and her team and the folks on the West coast to a really good job of balancing everything they need to balance to make sure. We have the right people and our properties that are and as I was thinking of their operations and we're getting into both economic deal possible.
I guess, Craig the only thing I would add to that and I do think this is such an important component of the negotiations or the bumps during the term of the lease and are.
You know it.
I mean, I know Dan goes to the math.
<unk> of what it means but but when you think about it in fleet inflationary time in and being able to push three and sometimes four and sometimes better annual bumps in into the lease they getting that along the way is a whole lot better than sitting there and looking at a flat.
A flat lease and maybe getting yet.
Getting 7% after after five years or something like that so so I don't know the best way that you can understand that or compare that I don't think we've found a good way that that can be compared but I know, it's a critical focus of the company and because of the real estate is really good we had probably more success are that way then then.
Who would otherwise think.
That's helpful. And then just a guidance question the lease term fees in the quarter looked like Canada, a couple of pennies on a sequential basis.
Kind of what's the what's the impact of that in the full year guidance raise and what are you expecting back half of the year.
The back half of the year I think it is.
Yes.
Probably back looking back last year in line.
With our last years.
Performance in the second half of the year.
We're probably two to three cents.
Term fees and that's reflected in the guidance.
Great. Thank you.
Our next question is from Samir Khanal with Evercore ISI. Please proceed with your question.
Hey, Hey, Dan can you help us walk through sort of the twenty-three growth at this time on the one side you know on the one side you've done a great job on the leasing front right the leased versus occupied that pipeline. It's it's it's.
Pretty solid here, but on the other hand you have.
Potential headwinds from from closures Santana West Me you know it seems like maybe you keep getting pushed out a little bit here on the timing perspective, I guess, how are you thinking about growth today versus a few months ago.
Look I think that.
We've been really pleasantly surprised with how strong the performance has been.
This is the first time I've been here. So my six years of federal where we increased guidance to this magnitude in consecutive quarters. We've increased to 10 cents one quarter and then 23 cents for the next.
No the five to 10 cent guideposts that we provided previously.
We're off of.
Previously lower guidance.
We feel comfortable with that guidance.
Kind of where 2023 years off of that I think we're going to take a step back with regards to 2023 and provide formal guidance.
The normal.
Timing.
We still expect to see strong internal growth in our portfolio.
But we'll provide more detailed formal guidance at the appropriate time in line with our with the industry in February .
Okay. Thanks for that and I guess, Don just on the acquisition of our Pembroke Gardens.
And you know with the 41 acres that comes with that property. Just curious is the near term goal of more of a rebirth merchandising play at this point just trying to figure out the near term and maybe kind of what the long term focus is on that just you know initial views.
Yeah.
There is just this piece of land is what made us.
So darn interested in this thing if you could kind of see where pines Boulevard nice 75 come together, there's no. There's no good product out there. There is there are amazing traffic counts and so we love what we love what we've got in place, albeit you will see remerchandise ing as.
As a J.
The primary.
The way we create value over the next few years, having said that and you know as well as I do big pieces of land things happen that you can't underwrite.
Initially and I know if you go and spend some time at the property and the surrounds and you'll look at housing stock around there you understand the traffic patterns.
You'd be salivating for the possibilities.
You know over the mid and longer term, even beyond the re merchandising of the asset, but that's what it would be for now.
Thank you. Our next question is from Juan Sanabria with BMO capital markets. Please proceed with your question.
Hi, Thanks for the time, just wanted to touch brought back and apologies if I missed this is there.
Any update in terms of the rent bumps you are getting and the strong leasing environment.
With regards to what you have kind of on the books and have historically achieved.
I don't know if I'm allowed to say this or not so I'm looking at Danaher.
Elisa because we we we do.
Try to take an accounting if you will all of you know how many of our leases at 3% bumps, 4% bumps flat you know whatever whatever is happening internally in the leases and I can tell you that the that over the past two two years basically what what's happened coming out of Covid, but not the beginning part of covered but coming out of.
Covid that the percentage of our deals that are that now have a stronger stronger than 3% bumps is up about 20% from where it was.
So the notion of being able to do more of those those deals which is bringing up you know the overall.
Ah portfolio to over 2%.
Annual bumps as as Dan said before so that the trend is in the is in the right direction and and it's been a major focus.
Okay.
Great. Thanks, and then just on the Phoenix Office acquisition, just hoping you could maybe spend a little bit more time on outlining our plan there and how that's integral to retail one if that's gonna be redeveloped as well potentially down the track.
Yeah, well, let me give you a couple of things I'm sure Jeff will have more more on this but I I personally couldn't be more excited about this first of all Hilton village, which we bought last year.
I just had a little more than that now at this point.
We just see.
Very strong re leasing potential to make it much more of a specialty shopping center with a higher end tenants because of where it is our first 12 months of leasing or so there has kind of validated that that that's what's happening. So so with respect to that first acquisition we are.
More than pleased with you know the basic thesis for buying it when this this office building adjacent to it which is a very attractive office building, but frankly leased in a very pedestrian way.
We think we can do the same thing on the office side to make it way cooler Ted Ted you know that's the right type of 10 base that would that's the same tenant base that we're aiming for in the adjacent retail property, putting those two things together, especially in a post COVID-19 environment, where where individuals and companies.
In the area are looking to be closer to home within a monetized environment, we feel like there's great upside all while.
Yeah.
Yielding over 6% yield while we do that so I love the idea of being able to not want to thank our vision for the retail and effectively expand and integrate what it is.
With that the the office building, which it really is building directly adjacent to it that that's the thesis for what we're trying to do here.
Yeah, Juan its Jeff and I'd, just add a couple of things one you know.
Both properties together is a synergistic in both directions. So we can certainly offer the office tenants the amenities of Hilton villages we.
Make the project look and feel like one project and market them together and.
Upgrade the merchandising and food offering and helping village like Don mentioned.
But having the office building is also good for Hilton village, because we just picked up a ton of parking.
Then we can use nights and weekends to support.
More intensive usage that Hilton village, so that's great.
And then second just kind of on a standalone basis, when you think about forum.
We bought forum for roughly $60 65 per cent of replacement cost.
85% leased.
And at rents that are probably 10% to 15% below market.
With a weighted average lease term of less than five years, so by upgrading the building.
And applying creative intensive leasing effort to it.
We think we can really bring those numbers up and.
Make the return much much better than it is today. So you know on its own we think where we think we made a real great real estate a deal. There's a couple of buildings in that market that traded recently, where a local developer done something similar.
To.
You know kind of class B b minus buildings and much much.
Lesser location in Scottsdale road across the street from <unk>.
Compare with <unk> Valley in those buildings sold a basically a replacement cost at sub five caps recently, so we think the institutional investment market.
Yeah, It's real estate like this and we think we made a very good buy and really happy to have it and like I said when I was answering Alex's question. We've proved multiple times now that monetizing office space.
Making a great space and having it in close proximity to decision, making a decisioning decision maker housing as a real win for us So just real real happy with the deal.
Our next question is from <unk> St. Jude with Mizuho. Please proceed with your question.
Hi, there I was.
Good morning, Don I was hoping you could talk a little bit about how being an all cash acquirer has given you maybe an edge and the acquisition.
Market here in terms of maybe geography for you.
Lows.
Is that something you expect to be able to continue to use for that is near term.
I noticed that there aren't any acquisitions contemplated in the in the second half guide here curious.
What if anything is interesting or perhaps under discussion out there. Thanks.
Yeah, and Alex dropped again.
We are obviously in a market, where there's less certainty than there used to be so having the ability to close all cash and not have to tap the secured mortgage markets is definitely an advantage as a buyer that combined with you know really a two decade track record here.
They're all being very transparent with our intermediate and intermediary and an owner are about what we'll do and what we won't do and how things are going along the way and ultimately doing what we say, we wont or we will do.
Good so steel's.
And get some steals and better prices that other people have to pay it. So you know.
We kind of like the type of market, we're in right now.
We think there's going to be more opportunities for all what Dan answer questions about that.
Our go forward guidance on that before before you do I want to add one thing to that handle and I really do think that's important and we've talked about this in the past when you look when you have multiple ways to grow and and you don't want to rely on any one thing you don't turn those switches on and off and when it when it comes to acquisition.
This is one of those examples where yes, you can turn it down when there's uncertainty of the pricing or turn it up when effectively you think you can get a good deal, but it is that ability to be in the markets regularly not just on the publicly marketed stuff in fact.
Hardly in the publicly marketed stuff, but the ability to do what you said you weren't going to do when you turn that off for a couple of years and turn it back on it's not much different than the dividend and not view, but then you I looked at differently than than when a seller knows you're going to be there and do what you say you're going to do so I think that is as much of.
An advantage as being an all cash buyer is in fact, I think it's more important sorry game got it now with respect to guidance, yes, we do have a pipeline and we do expect to be active on the acquisition front, but be disciplined, but we don't provide guidance for speculative acquisitions or dispositions when they happen.
Update guidance to reflect that.
So yes, there's no forward looking acquisition or disposition.
Our impact on the guidance we have.
Got it got it thanks, and maybe one more just on the snow rent you've.
<unk> been able to get them.
The stores opened on time get to sell rent then I I guess I'm curious if you're seeing any signs of the delays from labor shortages supply concerns and other restaurants.
Some concerns in certain corners about getting some of the equipment in place, which could be impacting the timing of certain things.
Yeah, It's a great question and it's been a critical focus and frankly, a worry of mine for the past year and a half there or a little bit more at the I don't exactly know beyond more beyond Oh, our approach to it why it has not been the problem that that I worried at this but it was going to be.
Well it has not been a we found alternate solutions.
And in a number of places it's been job number one for the operating team the tenant coordination team the the ability to effectively.
Do things different than the lease contemplated in order to get a restaurant open or a a store opened had been critically important tools and that again is the relationship part of our business. Its a critical part to it and so when I look at have we've been hitting our.
<unk> days.
The answer to that is yes, we have and it was the single biggest thing I was worried about cutting into our 2022. So it's being handled I think pretty darn well, even though the specter of of delays kitchen equipment and other things is certainly still out there.
I think its evident in our and our metrics are the fact that with record leasing volume.
We're tightening our spread between leased and occupied.
So we're getting we're getting tenants open and I think that's again in my prepared remarks, I mentioned and gave a shout out to the strength of our legal leasing tenant coordination and property operating teams they've been really successful on average getting tenants opened on time and in many cases ahead of time.
On budget.
Our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my questions you called out the strength of parking revenues and percentage rate or a percentage rent has that continued into August and how sustainable is that run rate achieved in the second quarter.
Yes.
Well, we we would expect kind of given a traffic in July was strong as well, where we have parking revenues coming in yeah.
Yeah, we hope that it continues to be sustainable I mean, I think the traffic volumes at our big mixed use properties, where we can charge a parking revenues.
We see that being a consistent source at least through the balance of the year.
Michael I think the only thing I would add to that is is so so yeah.
Where it comes from.
I just said are only a few of our properties and they're the big ones and and.
The all if you think about those properties, particularly Pike <unk> Rose and assembly row those properties.
Have matured as a critical places in their communities. So it's not it's not just about coming out of Covid. It's about these are now. These are now community centers. If you will and so I would expect the traffic comparisons period over period you continue to.
Increase as we've seen we've seen in July two I do obviously, when it's getting augusts. So we've seen that same thing at Pike <unk> Rose and assembly in July relative to the July of 2019, so I'd very much.
Positive or hopeful that it will continue.
That's helpful.
Follow up is just given the strength of all of these factors that you've noted how should we pair that with the implied same store property NOI growth.
Guidance for low single digits in the back half.
Well I think I think the the comparison or kind of the implied slowdown in the second half of the year is really weird Gil.
Difficult comps in the second half of the year plus yeah, the weight of prior period rent and and kind of a pretty.
Pretty modest forecast for term fees in the second half of the year, hopefully, we can outperform that but yeah, well I think that those are the big headwinds, particularly prior period rent, we got some pretty tough comps in the third quarter and even fourth quarter of last year.
Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everyone. Thank you I'll.
I'm trying to get creative most of what I wrote down was asked.
So your 2022 equity issuance guidance I think it moved back to $350 million at the midpoint from 450 million last quarter, just wondering if anything drove that.
When we did it in the share price related or should we read through that maybe 2022 acquisitions are pretty baked in at this point.
Yeah, I think with regards to you know, we are making progress and we've kind of pivoted and and and.
Elevated our discussions and our activity on the disposition front and given the visibility we have kind of as the year goes along I think that you know.
Dispositions can serve as a surrogate for kind of raising equity and given that visibility we are oh where were temporary.
Kind of the expectation of raising equity plus given where our equity is it's been trading.
So yeah, we've raised.
Alliance share of what we expected.
At a very young.
A really strong blended price.
Basically contracted for that all last year in 2021, when our stock price because you know obviously in a different time.
Really pleased that we did and I think it positions us where we look to be very balanced in how we approach financing the business and feel very very fortunate that were as well positioned to continue through with the.
The equity that we raised over there are you know throughout Covid.
Oh, Okay, great. Thanks, Dan.
So you know some investor pushback I hear on federal and has always been the high ABR right, but but despite the economic backdrop, right and really even more importantly elevated vacancies you know across your peer set you've continued to grow rents. So you know how.
Do you kind of respond to that and you know what does it really attributable to anything any thoughts there I think are helpful.
And its need to make money.
Rent is one component of their expense structure to the extent, they're doing the volumes and.
Trading value they'll pay the rent and with US it's not just about.
Now beaten on that tenant for rent, we our partners and so the notion of making that shopping center.
Or mixed use properly property is the best place the go to place.
Is is just a critical part to what we do I mean.
If you think about a therapy, the 580 basis points increase since the bottom of Covid in terms of small shop occupancy up almost six.
100 basis points that is that is only because there is demand from people who have a chance to get into a federal center, who could not get into it before because of the high occupancy and are willing to pay that because they're going to make money when they pay that it's really not it's really not much more than that and I know there's.
You know, there's there's always focus on our a b R. I've been here 25 years. It was focused on our ABR of 25 years ago.
Their better assets.
And you know those tenants can make money at those levels.
Our next question is from <unk> bin Kim with <unk> Securities. Please proceed with your question.
Thanks, Dan and good morning.
Quick one first.
What is your retention ratio have been historically and where do you see that.
A major of the year.
Yeah, I mean, historically, it's kind of been in and around 65, 70% and but we have seen better you know this year better retention rates north of 80%.
So we're pleased with that tenants have been successful at our centers they want to stay they want to renew when exercised options.
And they want to continue to make money.
And going back to that previous question about profitability I mean that makes sense right. It's not just sales to get to be profitable any.
High level metrics, you can share in terms of how much more profitable you'd think tenants can be at your centers.
Versus some other centers on a heap just low rent basis.
Yeah, just hang on a sense of what how much.
Basically there is for tenants to continue to pay the higher rents.
Well keep you and I'm just looking at Wendy's here, because I don't have a a metric that I can give you.
What do you think one it's the consumer spending time.
It's the it's the demographics that Don mentioned in his in his opening remarks, which is the quality of the real estate and the demographic markets.
Hi, average household incomes and had the ability to span so wow that's.
That's a critical component when they're looking at these markets. The other piece of it is a history. If you can go into a center as Don said, you haven't been able to get into federal Realty centers, all ways and they had a history of performing and there's value in that and that that's recognized so that's why we've been able to keep up if leasing demand is.
Because there's this.
This need to get and they might be doing less location, but they need those locations to perform and they are willing to make.
The higher spend in order to make sure that there's confidence that that store will be profitable.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question I'm, just going back to the quarter's leasing strength I know you discussed the philosophical manner tenants being able to make money at your centers, but where are you seeing outsized demand is it a certain tenant type or regionally based.
No Linda it's broad.
It it's broad I mean, where we see it at the mixed use centers in particular, because they were hurt the most during COVID-19.
But it hits its everywhere throughout the portfolio.
Portfolio I don't have a I don't have a better market or a worse market for you in terms of the one ones. We're operating in you know just just please always remember this is still a very local business.
And it comes down to the specific shopping center and the specific tenant base there in that shopping center and.
I think I I believe it is that it's broad based.
And then in terms of Biomed Realty I'm getting construction financing for the first phase at Assembly Innovation Park does this give you more conviction towards the large lease for life science tenant at Assembly row, you know what would you be looking for it to proceed with more confidence.
Oh, Oh, but please let me just just correct. The premise that we could not be more confident and assembly row as a life science destination for us for many many years and decades to come as we're just at the beginning of that all we've done at this particular time, given the uncertainty and in.
The venture capital market and what's happening there is that.
They hold back in and see where you now see where things become a little more certain and certainly great for biomet.
In terms of being able to raise that capital I wouldn't be I'd be surprised if they couldn't frankly, given the you know given.
Given that the Blackstone involvement to and we will be there I mean, there will be a life science building done by federal Realty on that site at some point, but prudence.
Prudence and capital allocation at this point suggest that we sit on the sideline left but it might get a little further.
Our next question is from Michael Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, Dan I think you were talking about cash collections in the quarter running at a higher level can you talk about what the what the level was in Q2, maybe how it compared to Q3, Q Q1 and is the higher level continuing into the third quarter.
Yeah, well, what we're essentially back to back to normal back to pre Covid collection levels on a current period collections were effectively above 99%.
Overall on collections and the AR in the second quarter.
So I I think Gil.
That is faster than we expected faster than we had forecasted.
And we expect that to continue yeah, there's a normalization in that part of the business with the added benefit of continuing to collect rent from prior periods.
Uh huh.
We're back okay.
Got it okay that was it thank you.
Yes.
Our next question is from Chris Lucas with capital One Securities. Please proceed with your question.
Hi, good afternoon everybody.
Talk a lot about the leasing strength on the retail side just curious as to.
How do you describe the leasing strength on the residential side and what the sort of rent growth has been in your portfolio.
On a year over year basis.
[laughter], let me go on the on the three big properties or actually four big properties. If you throw in Bethesda, Chris Let me go in order unbelievable at Assembly row.
20% plus 23%.
Our increase in rents just whats happening at Assembly row.
Not just on resi, but on office on retail as a as as such a critical place in the marketplace is really impressive and so so it should be very.
Optimistic about about the future, including rent growth future rent growth at Assembly Santana row.
Equally the the.
You know again, that's the place you want to live in I don't know, where we are on rent growth there.
Played into it teams are on there and looking extremely strong.
At Pike <unk> rose the demand is there, but we're still just about out of this.
Covid a cap on the amount of rent increases that there can be so it's artificially been kept down but you can see it from the occupancy and we know in terms of the demand to be able to move into the spaces that once that cap is is.
Lifted which should be hopefully later on this year.
You'll see similar demand. There. These are the type of properties people want to live in and you know it. It's the same as on on on the office side, It's a if.
You got to make some money you spent all that time and effort on creating the street in the place.
By getting it done upstairs too.
Okay, great. Thank you.
Just on the Plaza El Segundo sort of consolidating your ownership position. There I guess just curious is there anything operationally that improves what drove the timing a little bit of background on that.
Yeah, Hey, Chris It's Jeff So we had two individuals that.
The when we acquired the asset.
Guess, the very last day of 2011.
Sided to stay in the deal and they've been in in the.
Property with us as partners.
Since that point in time up to a few weeks ago.
They both decided they wanted to exit for you know.
Your own personal financial reasons, they had no day to day involvement in the running of the outside we reported to them on a regular basis and that was about the extent of it so.
No nothing changes or pause also condos or lifestyle, that's run or.
And we got it at an attractive an attractive return.
Our next question is from Paulina Rojas with Green Street. Please proceed with your question.
Good morning, Yeah, you talked about good thing Amazing you were seeing in breast meat is it possible to have a notion even a range for how we think property in Hawaii trending on a same property basis.
And it's.
Losses on investment segments.
High teens.
Paulina, we're having a hard time understanding you all.
Can you try to say.
Yeah.
Yes can you hear me now yeah.
Yes, that's better.
Okay, Yes, I was saying that it is it possible to have a notion of holly's same property NOI trending and for your office and rest of the segments.
Same property NOI for office and resin.
They're trending up.
We don't have those those and we don't publish those but.
But we can probably but there certainly heading in their models and forecast it to continue to trend up.
And we can talk offline about that holding it we can get a little more granular on that was it.
Okay. Thank you and then the other thing is and how you provided and.
Any reference for how much of your assigned but not opened and.
Leases are scheduled to come online in 2023.
Yeah, I think what we have.
Our existing kind of comparable pool.
It's about a 23 million of incremental rent, which should come online over about half over the balance of this year and half and 2023.
We have another $15 million of signed not occupied and our non comparable pool, which should come online are probably be a similarly.
And then yeah. So I think most of the lion's share of that will it will be over the next six quarters.
In terms of a contribution to our <unk> line item.
Our next question is from Tayo Okusanya with credit Suisse. Please proceed with your question.
Yes.
Good good afternoon first question.
Thank you for the update on just the life Sciences at the Assembly row curious if you could also give an update on life science potential that Pike <unk> rose.
At this point.
Yeah.
The.
As you know when I think about that market I don't think that market is as as advanced in terms of demand.
And supply as a summerville, Massachusetts is but it sure is on everybody's radar screen, including ours as to what it is that that we can do there. So we're having conversations with a number of people are there none of which are far enough for us to really say anything more.
About it but what do you know when you when you think about life sciences out of another use as a component.
At a place like Pike <unk> Rose I mean, it's a distinct possibility, it's going to come down economics.
And will be the incremental rent.
<unk> be enough to support.
You know the construction of of that.
That product type.
So we don't know the answer to that yet, but we're certainly in the heavily exploratory phases to find out.
Gotcha.
And then second of all some of the mall Reits and open Air Center, guys are kind of at that point, where they.
Renegotiating a lot in a short term percentage rent deals back to kind of you know.
More traditional leases.
You guys kind of running up against any of that at this point and does it kind of changed the dynamics of what.
The retail component of your income could look like in 2023.
So I would say that most of our percentage deals that we were working on Duane Cobra have all burned off and we have we had established new deals moving forward. So we are we are not still working on a tremendous amount of renegotiating post COVID-19. This is more kind of look.
Forward under a new Dallas based on the environment that we're in.
We have reached the end of the question and answer session I'll turn the call over to Leah Brady for closing remarks.
We look forward to seeing everyone. This all have a great rest of summer and thank you for joining us today.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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